Book Review – The Rise and Fall of American Growth

Rise and Fall of American Growth-bookcoverThe Rise and Fall of American Growth: the US standard of living since the Civil War by Robert J. Gordon1 is a weighty book in every regard. At 762 pages it is a heavy lift – not beach reading or even bed-time either. But I found it almost a page turner. It is very well structured and written. None of the fussiness or obscurantist language one often finds in academic works. The central point of the book is that during the period from 1870 to 1970 the US economy grew at an extraordinary and we will not see a return to that rate for some pretty fundamental reasons. Continue reading

  1. Princeton U. Press. 2016 []

Inside Goldman Sachs with the Federal Reserve

GoldmanSachsThe relationship between our financial services industry, our government, and us, ordinary citizens who have repeatedly suffered the consequences of the avarice and incompetence of this industry, has always been troubled. Booms, busts, crashes, bubbles, depressions, inflation. Since the beginning of the 2008 Great Recession we have hoped that the government would return to applying some real rational restraints on the financial system. To be honest, with both political parties deep in the pocket of the industry, this is probably merely wishful thinking.

The Secret recordings of Carmen Segarra

While you are listening to this report of regulators captured by the industry they are paid to supervise, think of the endless series of Wall St and corporate chieftains who have worked for every President of our life time. So,  don’t miss the current This American Life story about the Federal Reserve: “The Secret Recordings of Carmen Segarra” ((http://www.thisamericanlife.org/radio-archives/episode/536/the-secret-recordings-of-carmen-segarra))

FedReserveNY

Flash Boys Doesn’t Ask the Important Question

Flash Boys cover by Michael Lewis

photo by Patricia Wall/ NYTs

The new book, Flash Boys, by Michael Lewis has reignited the discussion of how our financial markets are rigged by high frequency trading.1 From my 2012 note: 

To turn back to HFTs, why do we need this kind of transaction? How do they contribute to economic growth? These activities are by definition a zero sum game. They are like every other form of gambling a zero sum game. There are winners and losers, but no incremental gain for the economy. Other than enriching the HFTs at cost to others with smaller computers and fewer PhDs on staff what do we get for allowing these activities? Potentially catastrophic destabilization of financial markets? Where is the upside for society as a whole? Isn’t  a primary purpose of any economy to increase the size of the pie, not just to redistribute existing wealth?

We should demand that our financial markets serve their fundamental purposes – connect investors with those who can deploy those resources to create new products and services and enable the flow of these goods and services. To call holding financial instruments whether stocks, bonds, or other assets for mere seconds investments is to beggar the mind. Government needs to step in to penalize economic activity that looks like gambling and certainly does not “grow the pie”. A sliding scale of transaction costs (aka a tax) could bring this to a screeching halt.2 There are sure to be complexities in how to implement such a strategy. But, if at every step we ask how a financial transaction contributes to economic growth at a systemic level, solutions will appear. Right now we have financial markets that are not only rigged but so complex and non-transparent that we are certainly setting ourselves up for future calamities like that which struck us in 2008.

  1. I have written about these issues earlier:  “High Frequency Trading and Deeper Questions about Capitalism” and “Wall St – not about investing but fixing the game” earlier []
  2. We would have to face the international crisis of how to employ all those PhDs currently engaged in the HFT wars []

Wall St – not about investing but fixing the game

playing cards courtesy of Chance Agrella, photographer

photo courtesy of Chance Agrella, photographer

An article in the NY TImes today reports1 that NY Attorney General Schneiderman is pursuing various information providers, Thomson Reuters in the immediate case, for their practices of selling market sensitive information preferntially. Those paying a premium get information several minutes before its release to the general public. This is more evidence that Wall St (standing in here for the financial sector as a whole) is largely a fixed gambling racket. Not much different than a casino. Continue reading

  1. Regulators Examining Early Sales of Financial Data http://nyti.ms/12hDF3t []

The Job Creators – Who Are They? The Rich, Really?

In recent years a standard bit of political rhetoric in the US has included references to “the job creators”. This most usually  flows along the lines of higher taxes on the wealthy will injure the job creators. Or, government regulation is crushing the job creators. The presumption of course is that the wealthy, the 1% in the current rhetoric, create jobs (and those not created by the wealthy are created by small business – this being another, long term part of our political discourse). Thus, government must do nothing that will upset the wealthy.

It must be noted that we have already had a large experiment with the obverse of this “don’t disturb the wealthy” policy. What if we made the wealthy even richer by lowering their tax rates? By simple logical deduction, this would incent them to invest more and create more jobs. Well, the Bush II years proved that this does not happen. Despite the largest tax reductions  on the wealthy in US history, job creation under Bush II was worse than in any presidency back to Hoover.

At some level believing the wealthy to be the job creators seems natural enough. They have lots of money to invest and in their desire for more they will be out investing in new projects that per force must create jobs. Without the aid of real analysis, I have always been a bit suspicious of this idea. Wealthy people have their money managed for them by large financial institutions and financial specialists. Very few of them are directly involved in any business other than the business of worrying about whether their financial advisors are ripping them off or doing stupid things. Why do real work when you can have your advisors leverage the vast scale of your wealth to get special deals on bundled high return financial instruments.

Nick Hanauer TED TalkAlong comes a wealthy guy, Nick Hanauer,1 with a five minute TED Talk debunking this job creator mythology that is more soundly thought out than my ramblings.

BTW – Hanauer’s analysis is straight forward Keynesian economics. We have a demand problem. US corporations have record sums of cash on the balance sheets. Yet they are not investing it. The answer is lack of demand, increased sales to generate the virtuous cycle of profits  followed by jobs. Though both the US and Europe are busy proving again that our economic problems are not going to be solved by austerity, debt reduction policies, other countries, like South Korea,  have proved anew the merits of Keynesian remedies. Unfortunately, we have no one in the elites who have the political will to do what has worked before very reliably. They used to call it “pump priming”. Now our pump is dry, unemployment and underemployment  is perniciously eating away at our society. 

  1. he was an early investor in Amazon []

Economic Inequality – Does It Matter?

It is fairly widely known that income and wealth inequality in the US is as high or higher than at any time except perhaps the Robber Baron period at the end of the 19th century. Lots of articles and books explain how this has come about over the last 30 years. In a recent NYTimes Magazine article, “The Purpose of Spectacular Wealth, According to a Spectacularly Wealthy Guy” by Adam Davidson, we are even offered an affirmative defense of this by a buddy of Mitt Romney from Bain Capital Edward Conrad.

Conrad… “aggressively argues that the enormous and growing income inequality in the United States is not a sign that the system is rigged. On the contrary, Conrad writes, it is a sign that our economy is working. And if we had a little more of it, then everyone, particularly the 99 percent, would be better off.”

But, leaving aside the obvious disconnect between any rational measure of value add by the wealthy and their incomes and holdings, does economic inequality really matter? Is it just that those of us in the not wealthy class, now branded The 99%, are jealous of all the toys of the wealthy? Their four or five houses, countless cars, airplanes, and all the rest?

Are their some measurable consequences to economic inequality? Continue reading

High Frequency Trading and Deeper Questions about Capitalism

A recent PBS Newshour report by Paul Solman on Thursday 3/15/12 in his series “Making Sense of Financial News” gave pause concerning the role of high frequency traders (HFT) on Wall St. (and doubtless on other markets around the world). First, you might ask what are HFTs? These are traders who use computer-based algorithms to select, buy, and sell shares on the markets. The speed of these transactions and the “thinking” that is performed is driving the HFTs to locate in lower Manhattan as close as possible to the main Internet port in the city. The few microseconds saved by not being a half mile away on Wall St. turns out to have great significance to HFTs.

The existence of HFTs first came to public notice when the great “flash crash” took place. On May 6, 2010 at 2:42 pm the Dow Jones industrial average, already down by 300 points that day, suddently lost more than 600 poijts in 5 minutes. 20 minutes later the market had regained the 600 point loss. Investigations pointed to the role of HFTs in these events. Since then there has been a lot of discussion of the stability of financial markets and the potential role of HFTs.

 

The Solman report noted that HFTs represent 2% of all the firms trading on Wall St., but conduct over 75% of the transactions. So, when you here that volume of the Big Board today was 3.56 billion shares (3/26/12) 2.67 billion were traded by HFTS. Solman also noted that the average time a share is held is 22 seconds.

What seems strange is that the question of the function and utility of HFTs is never examined beyond economists trotting out the well worn explanation that they are providing liquidiity to the market. By liquidity they mean the presence of buyers and sellers in the marketplace when someone wants to make a transaction. But is this a serious claim in favor of HFTs? Does this incredible display of computing power really mean anything more than people gambling on a fractional move within a few seconds?

"Capitalism works for me! true/false" by Steve Lambert 2011

Now an aside. In a video presentation1 by Steve Lambert about his work, “Capitalism Works For Me! True/False” he notes that people seem perfectly at ease thinking about global warming and the need to undertake massive changes in the fundamental underpinnings of our world, but when it comes to our economy we engage in endless euphemisms and obfuscations. From his website he says:

“For 50 years it has been unacceptable, politically, in the United States to ask what is basically a straightforward question. We have a particular economic system, it’s called capitalism. We have every right as a society to ask of that system, is it working? Is it working for us? Do the benefits and the costs balance themselves out in a way that says, do we want to keep this system? Or that says, we want to change this system? Or that says, we ought to look at an alternative system. We’ve been afraid to ask that question. We’ve been afraid to have public debates—that’s the legacy of the cold war. We can’t afford anymore to not do that. We have to raise the question.”

To turn back to HFTs, why do we need this kind of transaction? How do they contribute to economic growth? These activities are by definition a zero sum game. They are like every other form of gambling a zero sum game. There are winners and losers, but no incremental gain for the economy. Other than enriching the HFTs at cost to others with smaller computers and fewer PhDs on staff what do we get for allowing these activities? Potentially catastrophic destabilization of financial markets? Where is the upside for society as a whole? Isn’t  a primary purpose of any economy to increase the size of the pie, not just to redistribute existing wealth?

 

  1. I saw this at the the de Cordova Sculpture Garden and Museum in Lincoln MA []

Charts from Mother Jones Illustrate That the Rich Have Won the Class War

I came on a set of graphics in Mother Jones, “It’s the Inequality, Stupid: Eleven charts that explain what’s wrong with America” that illustrate what you probably already know. But, a simple refresher course in some of the reasons why the rich are rich. The 99% already have this base covered.

Here are some of the charts I liked. Read the whole article at the Mother Jones website.

Income (constant dollars)

Note that if median family income had simply kept up with inflation over this period it would have grown to $92,000 instead of $50,000.

Change in income-since-1979-2010

 

 

 

 

 

 

 

 

 

 

 

 

Are Corporations Over Taxed?

Mother Jones does not make it clear that the Payroll Tax is also a tax on individuals. To add insult to injury the Payroll Tax is not levied beyond the first %106,800 of income.

Share of Federal Tax Revenue - Mother Jones

 

 

 

 

 

 

 

 

 

 

 

 

 

How Are The Richest of the Rich Doing?

Top Incomes asTax Payers - Mother Jones

Where, Oh, Where Did Our National Debt Come From?

The political rhetoric of the current moment, chiefly flowing from Republicans, but barely challenged by the Democrats, describes tales of profligate over-spending by the Federal government matched with burdensome taxation. While it is true that Federal spending is higher proportionately than post-WWII norms, social programs are not the source of this over spending. One only has to look back to George Bush’s two terms to see the true sources of the debt. 

Impact of Bush Policies, economy and wars on budget deficits

War, Wars, More Wars

First up are our profligate wars. A recent study at Brown University’s Watson Institute for International Studies finds that since 2001 we have spent between $2.3 and $2.7 trillion on our adventures in Iraq and Afghanistan.All of these dollars are deficit dollars. George Bush did not ask for increased taxes to fund his wars. Barack Obama has not asked for increased taxes to fund his continuation of the Bush wars and now his new war in Libya. The final bills for these wars will reach $3.7 to $4.4 trillion.1 We are fighting these wars on the backs of our grandchildren and, as is becoming obvious from the disgusting collusion between Obama and the Republicans, on the backs of the poor and the rapidly disappearing middle class. You might think that since these wars are in our national security interests (the rhetoric of all recent Presidents) they would feel it right to ask the American people to sacrifice more than just our mercenary military but also take money out of their pockets. It has been too easy to have the Chinese pay the bill.

Pills, Pills, Drug Companies and the Health Industry

President Bush, aided by the drug industry and health insurance industry, pushed through a new Part D Drug Benefit for Medicare. This was unfunded by new tax revenues. The estimate for 2009 to 2018 is an additional $727 billion

Tax Breaks Everywhere – The Gully Swamper of Them All

Part of the religion of the right is that cutting taxes will increase economic activity and in the end generate higher tax revenues. History has proven this theory to be nonsense. George Bush, aided by members of Congress, both Republican and Democrat, passed enormous tax decreases. These bills with their charming titles,  Economic Growth and Tax Relief Reconciliation Act of 2001 and Jobs and Growth Tax Relief Reconciliation Act of 2003, created an enormous windfall for the rich and have not produced any job growth. In fact George Bush’s presidency is marked with the lowest job growth record of any president back to Herbert Hoover2. As is demonstrated by the graphic from the Center for Budget and Policy Priorities the tax cuts of the Bush years are the largets single source of debt.

federal_outlays_and_revenues_as_percent_gdp

Under Tax – But Are We Over Spending?

With all of the Bush tax cuts (and the extensions by Obama and the Democrats) Federal tax revenues are now 14.9% of GDP. This is roughly  16% lower than the share typical during the post WWII era while Federal expenditures are 24% of GDP.  The chart from the National Priorities Project “Federal Outlays and Revenues, 1930-2015” shows the historical trends of revenues versus spending. Note that the projected increases in revenue for 2011 to 2014 are the result of the projected lapsing of the Bush tax cuts. As demonstrated by Obama and the Democrats at the end of 2010, it is hardly a forgone conclusion that this enormous giveaway will not be continued. 

The chart clearly shows that overall Federal spending is higher than the post WWII norm.  Despite the political rhetoric of the moment, it is hardly shockingly high. This is especially true if you take into account the war spending and outlays for economic recovery during what is now obviously the most serious economic slump since the Great Depression.

 


  1. I won’t go into the costs of these wars in lost lives and displaced persons not the enormous moral costs. The Watson Institute website has information on those aspects. []
  2. see Wikipedia article here http://en.wikipedia.org/wiki/Jobs_created_during_U.S._presidential_terms []

Naomi Wolf’s The End of America – the movie

The End of America – a film by Annie Sundberg and Ricki Stern

Here is a summary1 of the ten steps discussed and illustrated by Ms. Wolf in the movie.

10 STEPS THAT CLOSE AN OPEN SOCIETY

1. invoke an internal and external threat
People who are afraid are willing to do things that they wouldn’t otherwise do.

2. establish secret (unaccountable) prisons where torture takes place
In a secret system, the government does not have to provide any proof of wrongdoing by those it holds, so it can incarcerate anyone it wants.

3. develop a paramilitary force
A private military force — under the exclusive direction of the “commander in chief” with no accountability to Congress, the courts, or the public — blurs the line between a civilian police force and a militarized police state.

4. surveil ordinary citizens
People who believe they are being watched are less likely to voice opposition.  To scare a population into silence, the government need only monitor the activities of a few to make everyone fear that they are being surveilled.  Every closed society keeps a “list” of so-called opponents it tracks.

5. infiltrate citizen’s groups
Spies in activist groups put psychological pressure on genuine activists by undermining their trust in one another. They may also disrupt legal activities, undermining the effectiveness of group efforts.

6. detain and release ordinary citizens
Detention intimidates or psychologically damages those arrested and also lets everyone know that anyone could be labeled an “enemy combatant” and “disappeared.”

7. target key individuals
People are less likely to speak out when those who are highly visible, like journalists, scholars, artists, or celebrities, are intimidated or have the livelihoods threatened.  Targeting those who are especially visible makes it less likely that people will speak out and robs society of leaders and others who might inspire opposition.

8. restrict the press
The public is less likely to find out about government wrongdoing if the government can threaten to prosecute anyone who publishes or broadcasts reports that are critical of the government.

9. recast criticism as espionage and dissent as treason
People who protest can be charged with terrorism or treason when laws criminalize or limit free speech rather than protect it.

10. subvert the rule of law
The disappearance of checks and balances makes it easier to declare martial law, especially if the judiciary branch continues to exercise authority over individuals but has no authority over the Executive branch.

The movie presents these steps with lots of references to fascist and communist totalitarian history, particularly Nazi Germany and the Soviet Union. According to the movie we are rapidly moving away from a democratic open society to a closed fascist one. The historical context for these changes in America is strictly the post 9/11 era and Ms. Wolf seems blind to the extent to which our society ceased being very open and veered away from democracy long ago. The seeds of our present situation in which corporatist interests joined at the hip with the American Empire and its military/security apparatus substantially dominate politics and the mass media are to be found long before 9/11.

An interesting aspect of this list, and a significant blind spot for Ms. Wolf and the makers of this movie,  is the extent to which most of these “steps” have been present consistently in American life. John Adams and the Federalist’s Alien and Sedition Acts of 1798 speak directly to steps 8 and 9. Cold War America used Steps 1, 3, 4, 5, 6, 7, 8, 9, & 10 throughout this period. The post WWII security state has consistently treated the Constitution and Bill of Rights as rhetorical cannon fodder for propaganda to be ignored or more forthrightly nullified when found inconvenient.   For the most part, Ms. Wolf’s Ten Steps really stand out because they have been the subject of enormous intensification and institutionalization since 9/11. The American domestic security state is now united with the war making operations of the DOD to make the reach of American government truly comprehensive globally and domestically.

The government and the mass media, in a self-serving and cynical fashion, blew the 9/11 attacks into a gigantic existential threat. To this day 9/11 is treated as though it were a 21st century Pearl Harbor. In practical terms, 9/11 was a mere pin prick to an elephant. Though this attack wounded our self-perception of invulnerability and offended our sense that we are the saviors of the democratic world, it was just a terrorist attack, an incident to be dealt with proportionally, not by passing draconian Patriot Acts and building a gigantic addition onto the US security apparatus. Not to mention using this as a pretext to launching wars in two countries that have now lasted more than ten years and cost in the $ trillions.

On top of that, the government, in a completely bi-partisan display of unity, seized the opportunity to build whole new empires of security. We have the Department of Homeland Security with a $57 billion budget for fiscal 2012 and more than 200,000 employees (third largest department). 60,000 employees are in the TSA, that wonderful institution of airport silly business.

We now have to remove our shoes to get on an airplane, but do not have control of the hundreds of thousands of shipping containers that come to our ports each year. Better to demonstrate to the American populace the cost of our security by conducting invasive pat downs than to undertake real protection measures that might slow down commerce or even increase the expenses of corporations. I have been having a recurring bad dream of a small container ship floating into one of our harbors with a dirty bomb on it that we seem to have no effective means to prevent or detect.

Viewed from the perspective that Ms. Wolf’s Ten Steps are not new, but simply an intensification of fifty years of the American Empire, I think only the brutish forces of history will undo this mess.

 

  1. from the endofamericamovie.com website – 05/27/2011 []